Why is the market waiting for the D-Mart IPO?
Mumbai: One of the most profitable food and grocery retail chains in India is about to go public. Avenue Supermarts, the parent of the Mumbai-based D-Mart chain of supermarkets, announced it will sell shares on 8 March.
The firm had filed a draft red herring prospectus with capital markets regulator Securities and Exchange Board of India (Sebi) last September to raise Rs1,870 crore.
Avenue Supermarts has been a widely anticipated public issue for a while now.
In fiscal 2016, the firm made a profit of Rs300.21 crore on a revenue of nearly Rs8,600 crore. The company’s profit after tax rose about 50% year-on-year.
Compare this with the revenues and profits of D-Mart’s biggest rivals. Reliance Retail, a subsidiary of Reliance Industries Ltd that operates supermarket chains across categories such as fruits and vegetables, staples and jewellery, made a net profit of Rs306.54 crore. What’s more, the company’s annual revenue was Rs18,399 crore, more than double that of Avenue Supermarts.
Avenue Supermarts has also outperformed Kishore Biyani’s Future Retail that posted a net profit of Rs14.55 crore in fiscal 2016 following a Rs379.21 crore loss the previous year. The firm’s annual revenue was Rs6,845 crore, slightly lower than Avenue Supermarts in size, according to its annual report for fiscal 2016.
Other retailers have it worse. RPG Group-owned Spencer’s Retail loses money. Last fiscal year, it generated Rs1,881.31 crore in revenue, but posted a Rs168.16 crore loss.
It’s not just numbers that make Avenue Supermarts attractive. The company was set up by serial investor Radhakishan Damani, famous for mentoring investor Rakesh Jhunjhunwala, who is often referred as India’s Warren Buffett.
D-Mart has had several other factors going for it. The company owns most of its stores and has a real estate subsidiary. Besides, in its draft red herring prospectus, the company pointed out that it focuses on offering consistently lower prices and steers clear of any promotional discount offers.
“One of our key strengths has been our ability to offer our customers value-retailing and daily low prices and consequently greater daily savings”, the company said in the offer document. “This has been possible in part due to our strong supplier and vendor relationships and our pricing strategies.”
On discounts, D-Mart remains firm. “We have not followed this model in the past and do not intend to follow it in the future,” it said in the share sale prospectus.
The company follows what it calls a EDLP and EDLC pricing strategy, short for Every Day Low Price and Every Day Low Cost. So, D-Mart customers feel they are guaranteed to save when they shop from D-Mart, rather than chase discounts in stores, which does not guarantee customer loyalty, the prospectus said.
In October 2015, Mint had reported that D-Mart has found success in focusing purely on the food and grocery business, unlike its rivals who have forayed into the electronic goods, apparel and home segments as well.
Besides, D-Mart stores has one of the highest inventory turnover ratio in India, meaning it takes the lowest time to convert its inventory into sales, keeping its inventory costs low.
To be sure, the price of the D-Mart offer will also play a role in its IPO’s success.
Arvind Singhal, chairman and managing director of retail advisory firm Technopak, says the excitement around the issue stems from investor appetite for retail and consumer stocks.
“There has been a lot of excitement around the retail sector for more than 20 years in India”, he said. “And now a physical retailer kept completely under wraps by a media-shy promoter, Mr Damani, is going public. Besides, with a growth rate of 40-50% per year, it is a good bet for investors looking to buy into India’s consumer story. Most well performing retailers like Metro Shoes and Fabindia are privately held, while investors get to put money in Reliance Retail indirectly through Reliance Industries, the parent company. Others like Aditya Birla Retail haven’t done so well.”
The public issue is expected to provide a partial exit to its biggest shareholders, the Damani family. Together, R.K. Damani, his younger brother Gopikishan S. Damani and Shrikantadevi R. Damani hold 91.34% of the firm’s shares.